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Funding home renovations

From a top-up on existing home loan to a fresh home improvement loan, you have a few choices

If you are thinking of adding a new floor or room to your house or improve upon the existing structure, loans from banks or startups or NBFCs that specialise in home financing are an option you could consider. They offer rates that compare favourablywith home loans.

If you have an existing home loan, an easy and quick option is doing a top-up on the existing loan. The loan can cover any personal consumption purposes, provided you are within the loan-to-value limits for the property. However, if you are borrowing over 25 per cent of your existing home loan amount, the balance is classified as loan against property and this may be charged a higher rate of interest, says Anshuman Mishra, Founder and CEO of LoanAdda, an online loan portal.

To avoid these hassles, even if you have an ongoing home loan, a home extension loan may offer a better deal when you are adding a new floor or rooms. If you are renovating or improving your home without adding any additional square footage to the building – i.e, if you are planning only painting, carpentry, plumbing, electrical, masonry, flooring works or adding appliances or furniture, home improvement loans can be considered.

While institutions such as HDFC differentiate between home extension and home improvement, banks such as Bank of Baroda and Canara Bank offer only one product to cover both the purposes. The interest rates on these loans are identical to rates offered for regular home loans. Some lenders, typically PSU banks, have allowed furniture and home appliances, such as A/C and geyser purchases, under the home renovation loan while others may be stringent about the loan purpose.

Loan process

A quotation from an architect or contractor with details of the work and estimated costs is required to apply for a loan. Typically, you can get between 70 and 90 per cent of your planned expenses as loan. But it may be capped based on the applicant’s age or their risk profile, notes Rakesh Makkar, MD, Grihashakti - Fullerton India Home Finance Company.

Lending institutions may also do a validation of the quote against their own benchmark. Structural evaluation may be done if the house is old; for larger loans, legal evaluation and value appraisal may also be done. All copies of deeds of the property and originals might be required for verification, says Ranjit Punja, CEO and Co-founder, CreditMantri, a credit advisory service. Given the paper work typically involved, it may take 7-15 days for processing the loan.

The maximum loan tenure is generally limited to 15 years. The rate of interest can predominantly be comparable to home loan rates, but it may differ based on your credit history. You also have to pay a loan processing fee in the range of 0.5-1 per cent of the loan amount.
Points to consider

Home owners may do well for themselves by avoiding some common pitfalls. One, you can do a comparison of bank rates and calculate your eligibility using tools available online. This can help you decide your budget and understand the monthly EMIs before taking the plunge.

Two, have a realistic view of both the expenses and your loan eligibility. For example, the quotes from the contractor may have only covered big-ticket items and the final dues may turn out to be larger. So, you must budget for additional funds and not max out the loan amount. Likewise, owners of independent homes may find that the valuation appraised by the banks is lower than market rates, thereby reducing the maximum loan amount they get, says Parth Pande, Co Founder and CEO, Finance Buddha, an online portal for loans. This is because lenders are usually conservative in assigning value to land.

Three, doing all the paper work to get a home renovation loan rather than taking a personal loan may be well worth it. It being a secured loan product, interest rates on home renovation loan tend to be 4-5 per cent lower than that for personal loans.

Four, the interest rate and terms on the loan depend on your credit score and it helps to improve your credit worthiness by clearing up loans and dues. You can also save on interest payments by timing the loan dispersal. For instance, if the work is to go on for a few months, you could opt for multiple dispersals that are spread out instead of a one-time dispersal.

Five, be sure to retain all the original bills. The amount spent towards renovation, extension, and repair of the property is added to the cost of acquisition for calculation of long-term capital gains at the time of sale of property, says Nitin Bhatia, a tax advisor. You can claim indexation benefit for calculation purpose and reduce capital gain tax liability at the time of selling the property.